Midsize Is Now a Fit for SBA
As published in the US Banker by Barbara Morrison in April, 2011:
Midsize Is Now a Fit for SBA
Did you know that the U.S. Small Business Administration has changed how it defines a small business? Now a firm with up to $15 million in net worth, regardless of sales volume, and average after-tax earnings of up to $5 million for the past two years is considered “small” by the SBA.
These newly-eligible businesses can take advantage of attractive below-market, fixed rate loans for commercial real estate projects in excess of $20 million.
Middle-market companies historically exceeded the size standards for SBA financing. But legislation passed by Congress in September changed that. In addition, the new legislation, called the Small Business Jobs Act, increased the size of commercial real estate projects that can be financed under the SBA 504 loan program.
This means the SBA can finance larger commercial real estate projects for larger businesses. And this creates new opportunities for middle-market companies and lenders.
Under the 504 program, borrowers have two loans: a first mortgage from a conventional lender, and a second mortgage from a certified development company, or CDC. Though it varies, the breakdown is generally 50 percent from the lender; 40 percent from the CDC, which is backed by the SBA; and a 10 percent down payment from the borrower. The lender’s portion is a conventional real estate loan. The term must be a minimum of 10 years. Rates can be fixed or variable. The SBA portion is a below-market fixed rate and fully amortized for 20 years.
The new legislation increased the maximum amount of the SBA portion. As a result, projects in excess of $20 million are now good candidates for the 504 program. Formerly capped at $2 million, the 40 percent second mortgage can now be as much as $5 million or $5.5 million.
Manufacturers and green energy projects are eligible for the larger $5.5 million second mortgage. There is no limit to the amount of the bank’s first mortgage, nor is it limited to only 50 percent of the total project cost. Borrowers can also increase the percentage of their down payment.
For middle-market lenders, this is an opportunity to offer more customers an attractive alternative to conventional real estate financing—one that allows the business owner to preserve cash by structuring a loan with only 10 percent down and locking in today’s historically low fixed rates. By helping these business owners tap into the resources of the 504 program, lenders can build lasting relationships that will create loyalty from existing customers as well as help attract new ones.
Today many businesses face the daunting task of refinancing a property that has decreased in value. But one of the most innovative and exciting provisions of the new legislation relates to debt refinancing. For the first time ever, business owners will be able to use low-interest SBA-backed loans to refinance existing non-SBA commercial mortgages.
This is a rare opportunity for businesses to restructure their commercial real estate debt. The program, which is structured like SBA’s traditional 504 program, ends on Sept. 27, 2012. It is expected that as many as 20,000 businesses may ultimately participate.
For now, the SBA has opened the program to businesses with immediate need—those at risk of foreclosure because they face loan maturity or balloon payments before Dec. 31, 2012. It is possible that the program could be expanded to other businesses in the future.
To qualify, applicants must demonstrate that their loans are current and that they have successfully made all required payments in the last year. A new, independent appraisal will be required for all projects. The SBA will perform full and thorough underwriting on all refinancing applications (so there are no “delegated” lenders). Initially, the first mortgage loans on existing 504 projects are ineligible and “cash out” refinancings are not permitted. Government-guaranteed loans are excluded from the refinancing program as well. But the SBA may revisit these restrictions later.
The funding for this pilot program is limited to $7.5 billion annually. So it is likely demand will exceed the funding. But by utilizing these new SBA options, banks and certified-development companies can help small and midsize businesses benefit from better access to credit.
Morrison is Chief Executive Officer and Founder of the Certified-Development Company TMC